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Dividends vs Salary: Which One is the Best Suited for You?

dividends vs salary

Getting less salary means your company might have profit and it leads to eligibility of taking dividends. You may have question about dividends vs salary and need to know which one is the best suited for you?

As being a director and shareholder of a limited company here in the UK, you are entitled to salary and could be dividend as well as. However, everyone has a question which one is the best for them? We can simply say that it depends on your circumstances. Here is a brief comparison in the below to take into your consideration based on your situation. 

What is dividend?

Dividend is the payment that are distributed to the shareholders based on the proportion of shares and you can pay dividend if the company has profits. You cannot pay dividend if you are not making profit in your company. 

 

What is director’s salary?

Usually, salary is a fixed regular payment in return of the services provided. Being a director and taking regular fixed salary means you are an employee of a limited company, and your salary is subject to national insurance contributions. 

Benefits and downsides of taking dividend

On the other hand, you have also a range of pros and cons of receiving dividend from your company.

The benefits of taking dividend: As a shareholder of your company, getting dividend leads to:

  • Neither employee nor employer is subject to national insurance contributions
  • Dividend is usually low-income tax rates, and you also have tax free dividend allowance

The downsides of taking dividend: Getting dividend as a shareholder could downside as the follows:

  • Dividends are not tax deductible like salary and can only paid out after the corporation tax
  • Unable to get required income as dividends are unpredictable income
  • As dividends are not “relevant earnings” and hence no tax relief on pension contributions that you make.
  • Dividends could be subject to director’s loan that must be repaid if the taken dividends are not covered by profits

Benefits and drawbacks of taking salary

You have pros and cons of taking salary as being a director of the company.

The benefits of taking salary: There are several benefits once taking salary from your company:

  • Able to be getting salary regardless of making no profit
  • Entitle to claim some statutory benefits including maternity
  • At pension age, you will qualify for better state pension as contributing of national insurance
  • It is easier to have critical illness insurance cover once getting salary
  • Salary is corporation tax deductible expenses

The drawbacks of taking salary: In contrast, getting salary also means some drawbacks including:

  • Salary is subject to higher income tax rates in compare with dividends
  • National insurance contributions are paid by both employee and employers, which are costly
  • You may have experience of making loss in your business

What factors should you consider when choosing dividends or salary?

There are several factors need to be considered whether you take dividends or salary. Here are few facts that might help on your decision:

  • Tax-efficient: Potential tax savings associated with both salary and dividends, and you need to find the “best take home” based on your circumstances
  • Business growth: Consider about your business growth while thinking about salary or dividends
  • Financial consistency: Everyone has personal regular commitments and hence need consistent income stream where salary help to get fixed regular income
  • Compliance matter: You have legal obligations that dividends are paid out of profit only. You are subject to self assessment tax compliance once having dividend
  • Future planning: From each option, estimate which one supports the most at your pension age

Finally, we can recommend that you may choose the combination of both dividends and salary. How much you should take from this option? It depends on your personal circumstances including your regular commitments and future planning.

Our dedicated team here at The Stan Lee, we can assist with certainty on your dividends and salary affairs including free initial advice and self assessment tax return.